Why
did the National Bank of Kazakhstan cut interest rates?
Reading the press releases of Kazakhstan’s central
bank, one thinks of Alice in Wonderland. This week, the National Bank cut its base
interest rate by one-fourth of a percentage point, to 10.25%, with 1% of wiggle
room either way. Usually, central banks reduce interest rates in order to
stimulate the economy, since lower rates bring down the cost of borrowing money
to build homes and factories. But the
Bank notes that the economy is already recovering. “The economic activity
continues demonstrating the recovery; the trends in the domestic consumer and
investment demand dynamics remain positive. The recovery of economy is
confirmed by the trade data, employment and external demand indicators.”
So what is the point of further stimulus? The Bank
says mysteriously that “taking into the account the existing uncertainty and
the volatility of the external conditions, [it] has reconsidered the possibility
of the further reduction of the base rate in the short run.” It seems to be
referring to a surge in cereal and dairy prices that raised a United Nations
food price index in July. And that’s it. The Bank is acting upon a one-month
price change.
The Bank concedes that commodity markets are
stabilizing and that in particular food prices are predictable: “The price
statistics of both socially important food products and nonfood products and
services in general matches the historical dynamics of the price movements in
this period.” So where is all this uncertainty? Well, “the increase of the external pressure
was also caused by the change of economic conditions in the countries – main
trade partners.” That could mean anything.
Apparently, the Bank cut the base rate just for the
sake of doing something, like a bored teenager. Oddly, for all its professed concern about
uncertainty, the Bank does not consider that its own penchant for changing
interest rates at the drop of a hat may itself create uncertainty.
Future
schlock
In setting interest rates, central banks often
recognize a short-run trade-off between unemployment and inflation. If the
economy is running at close to full capacity, then an attempt to produce more may
drive up input prices and thus output prices. The National Bank isn’t worried
about inflation, but it should be. It writes, in its usual garbled English, that
“the negative dynamics of the real wages limit the inflationary risks.” If the Bank means that real wages are
falling, then that may increase
“inflationary risks,” since workers will try to make up for their loss of
purchasing power by negotiating higher wages when the demand for labor is
rising. Firms will try to pass the buck to consumers by raising output prices,
which will feed inflation.
The Bank also writes: “The gradual credit expansion
supports the consumer demand; however the further expansion of the consumer
credit will depend on the dynamics of the interest rate for individuals, which
currently remains at a rather high level.”
A question for the Bank: If consumers borrow (and spend) a lot when
interest rates are high, will they borrow less when interest rates are low
thanks to the Bank’s rate cut?
The Bank has no coherent theory of inflation. For example, the Bank says that it defines
the real interest rate as “the nominal interest rate adjusted for the targeted
level of inflation – 5-7% in 2018.”
Economists usually define the real rate as the market interest rate plus
the expected rate of inflation, which
lenders tack on to make up for lost purchasing power when they are finally paid
back. Evidently the Bank defines
expected inflation as its own inflation target, implying that it thinks that
people are blissfully confident that it will hit its targets. The Bank must think
that its monetary policy controls the inflation rate -- and that people
recognize this. But the Bank doesn’t
treat the money supply as the driver of the inflation rate; in fact, it nowhere
mentions money supply in its statement.
Instead, it attributes inflation to such factors as food prices, which
it does not control.
Straight talk:
At the moment, output is not the biggest problem in Kazakhstan. The economy is growing 4.2% per year, the
highest rate since 2013. The
unemployment rate is 4.9%, the lowest since 2006 at least. But inflation, 7.1%, is more than triple the
rate that prevails in the West. This is
not a new problem for Kazakhstan, and the Bank cannot make it vanish simply by
picking an unconscionably high rate of inflation for its target and pointing
out that the actual rate is below the target. Neither can it control inflation
by treating the money supply as an act of God.
-Leon Taylor tayloralmaty@gmail.com
References
National Bank of Kazakhstan. Press release #23: The
base rate reduced to 10.25%. August 21, 2017. nationalbank.kz
Statistical Committee of Kazakhstan. Various statistics on real gross domestic
product and the unemployment rate.
stat.gov.kz
